Britain's Spree of Multi-Billion Incentives

While the 17-nation Eurozone struggles with the introduction of its permanent €500 billion financial security mechanism, Britain itself, apart from their 2008 bail-out packages, has so far initiated more than €661 billion in monetary easing and other sterling financial incentives.

Some of the Eurozone national parliaments keep refusing the implementation of the €500 billion bailout scheme, while the German constitutional court has taken time until mid-autumn to decide whether the European Stability Mechanism approval by the Bundestag complies with German laws.

Also, the confusion hanging over the European Central Bank's role within the common currency union, whether or not it should become the lender of last resort, or have the capacity to inject liquidity directly into the common currency union banks, continues to pose a serious threat to proper functioning of the euro area.

In Britain, apart from the current monetary incentives, the British government and the central bank dispatched a bank rescue package totaling some £500 billion back in 2008 to bail out ailing British banks during the peak of the financial crisis.

The second package in the amount of around £50 billion was announced by the British government in January 2009.

Incentives-driven Britain

As regards the current UK incentives, unlike the EU's €120 billion growth package, Britain has already initiated €661 billion in both the central bank and the government's incentives in order to secure the recapitalization of British banks, stimulate demand and growth, and aggregate loans for small and medium-sized businesses.

First, the Bank of England's quantitative easing (QE) program has been recently extended by additional £50 billion to reach a total of £375 billion.

The purpose of the QE is to inject money directly into the economy in order to boost nominal demand. The policy is designed to circumvent the banking system where the Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies.

Then there is the Extended Collateral Term Repo (ECTR) Facility, which the Bank of England re-launched mid-June. It is an additional sterling monetary framework available for all banking houses signed up to the Bank's Discount Window Facility.

The Bank of England plans to hold ECTR auctions at least once a month until further notice.

The size of the auctions will be at least £5 billion and will be announced on the business day preceding the auction, at 4:00pm. The terms of borrowing under each auction will be 6 months and the minimum bid rate in these auctions will be a spread to bank rate of 25 basis points.

The third extension to the existing monetary stimuli is the so-called 'Funding-for-Lending Scheme' in the amount of £80 billion designed to stimulate the real economy in a way that the more banks lend to businesses, the cheaper the funding will be for them.

Multi-billion infrastructure projects announced in Britain

The latest two multi-billion incentives have been announced this week.

The first comes in the form of £9.4 billion government investments in railways constructions across England and Wales in what the government describes as the biggest investment in rail infrastructure for the last 150 years.

The second incentive has been announced on Wednesday. The government plans to underwrite a total of £40 billion of investments in infrastructure in order to lift the economy.

Chancellor George Osborne argues that the UK Guarantees scheme would help release private sector funds and launch schemes which have so far been subdued due to the funds shortages.

An additional £10 billion of guarantees would be earmarked to support struggling British exporters, Osborne said.

Britain's GDP dependent on export-driven economy

Britain has been acting rather aggressively since the peak of the crisis in 2008, injecting billions of pounds into the economy with hope of reversing mediocre economic growth and secure its banking industry.

The UK GDP is expected to remain flat overall in 2012, after seeing the first quarter of 2012 sinking 0.3% below zero. The second quarter national output is also anticipated to have remained in red numbers.

The second half of the year is however expected to pick up to offset the negative first half of the year for the GDP to remain flat in 2012. Economists expect the growth to be stimulated by decreasing inflationary pressures as well as increased household spending.

However, many warn that the long-term economic growth will be strongly dependent on how much Britain will be able to strengthen its export-driven economy.

Similarly, the Bank of England monetary policy makers point to the weakening export prospects for Britain, which would further impede the economy's re-balancing away from domestic demand towards net exports.